Multinational Firms and Impacts on Employment, Trade, and Technology: New Perspectives for a New Century

Synopsis

This collection of essays shows the high degree of complementarity between foreign direct investment & home export, challenging the long held fear that firms investing abroad leads to a loss of employment & decline in the home country.

Excerpt

For several decades governments, politicians, and trade unions have feared that investments abroad by home multinational firms, especially manufacturing ones, involved replacing home workers by foreign workers with a resulting loss of home employment and a decline in wages. The implied assumption was that total world production and consumption were fixed, and that production abroad would reduce home production by replacing home country by local production and increasing imports from manufacturing foreign affiliates.

According to these hypotheses, production abroad is a substitute for production at home and the impacts on home country production and employment are necessarily negative. Similarly, recent theoretical approaches, including multinational firm theory, often tend to picture firms as having alternative ways to exploit a fixed and given foreign market: export, licensing or foreign direct investment (FDI). The multinational firm maximizes its profit by selecting the lowest cost combination of licensing, exporting or producing abroad to meet a fixed demand. More recently, in the strategic approach, FDI is viewed as a means to preempt local markets and to avoid entry or expansion by local or rival foreign firms.

These approaches, because of the restrictiveness of the assumptions involved, and the neglect of macroeconomic determinants of production and employment, do not reveal much about the impacts of FDI. The analysis of the impacts on parent firms is enriched by an examination of the complex relationships between parent companies and their foreign affiliates. With the establishment of a foreign affiliate, a wide variety of events may follow. The firm as a whole may increase its share of a host country market, earn a share where there was none before, as is often the case in a service industry, or create a market where there was none before. Intra-firm trade is created; a parent company may export to its subsidiaries capital goods, skilled labor, equipment, intermediate products or even final products of a different type or quality from those produced locally. Affiliates can also export to their parent companies or to third countries inside or outside the multinational's network of affiliates. The network links give many opportunities for exports and FDI to be more complements than substitutes. This has been a major result of empirical researches.